U.S. Natural Gas Goes Global

World LNG Estimated Landed Prices September 2018. The U.S. is woefully undervalued which is hurting the industry. Just a pipeline south into Latin America would do wonders for the U.S. industry.FERC

As much as fossil fuel alternatives are increasing, natural gas is increasing more. Gas dominates the American energy scene and will continue to grow faster than all other energy sources in the United States.

At prices less than $3/MMBtu, natural gas is undercutting nuclear and coal. Renewables can only compete with huge subsidies and state mandates. Besides, renewables need gas to load-follow them so gas loves wind and solar.

But there are fears that the industry may not be able to maintain these prices. Richard Myers sums it up like this – the industry can’t make a lot of money at these prices and producers won’t keep this up for too long.

The United States used almost 30 trillion cubic feet of natural gas last year, but we have well over two quadrillion cubic feet of natural gas that everyone thinks is recoverable at $4/MMBtu. But costs vary wildly within the same play, sometimes by 100%. (A play is group of petroleum fields in the same region in the same geological setting)

At the same time, demand for gas will continue to increase. State legislatures love gas, the regulatory and permitting agencies love gas. Many environmentalists love gas since it’s easier on the environment than coal and oil and has brought down our country’s carbon emissions to a 27-year low.

By 2025, America will have to double gas production to meet demand. Many sweet spots will be played out by then, so prices may have to rise above $4 or $5/MBtu to incentivize new production.

Natural gas plays in the United States have over 2 quadrillion cubic feet of recoverable gas, supposedly at about $4/MBtu. But with demand accelerating, and production costs varying wildly, the industry may not be making enough profit to fulfill its promise.EIA

The industry’s savior may well be connecting to the global market.

Unlike oil, we are not connected to the world market, and until we are, gas prices will continue to remain low. The figure above shows the significant price differences between gas in the U.S. and in other markets around the world.

But connecting will take a lot of pipelines north and south, and a lot of Liquefied Natural Gas terminals and tankers.

Which is exactly what’s happening.

LNG terminal planning and construction in the United States has skyrocketed beginning in 2010. Just three years ago, there were only two operating LNG terminals, ConocoPhillips’ Kenai terminal in Arkansas and Cheniere’s Sabine Pass terminal in Louisiana.

Today, there are 20 LNG and regasification terminals operating or under construction in North America, with another eleven approved for near-term construction. That’s a big change. Of course, Japan alone has 30, so we have a ways to go to dominate the global market like we think we could.

This expansion explains why the EIA projects that U.S. LNG capacity will rise from about 14 billion cubic meters (bcm or 400 billion cubic feet) per year to about 110 bcm (3,000 bcf) by 2020. Ultimately, the goal is 200 bcm/year (5,600 bcf/year) by 2030.

Chuck DeVore notes that a mere decade has moved the United States from fearing gas shortages to becoming a serious gas exporter, predicting that we will become the world’s third largest LNG exporter within two years, behind Australia and Qatar.

This is good news for Europe and bad news for Russia, who has been using its dominant gas supplies as a predatory weapon.

This is in contrast to the oil industry which is having trouble making a profit because they are hooked up to the global market which controls the prices, primarily by the sweet crude of the Middle East that is much cheaper to extract than our shale oil. Even though we appeared to have won the 2014-2017 OPEC-U.S. oil war, and our costs for extracting shale oil keeps dropping, this dynamic tension will continue.

If production meets expectations, the cost of natural gas in the United States should stay low, below $4/MMBtu, for a decade, and below $5/MMBTU for decades after that, even as we provide more and more of our shale gas to our domestic demand and to the world.

Italy’s first cargo of US LNG was delivered from Sabine Pass to the floating storage and regasification unit (FSRU) Toscana on December 7, 2016. FSRUs are increasingly popular because they are quicker and less expensive to install than onshore facilities. Source: Atlantic Council.Wallacepc67/Wikimedia

An MIT special study on the future gas concludes that, in a carbon-constrained world, a level playing field — that is, a carbon dioxide emissions price for all fuels without subsidies or other preferential policy treatment —maximizes the value to society of the large U.S. natural gas resource.

Waiting in the wings to disrupt this rosy future, however, is this growing demand in the United States for natural gas. To load-follow renewables, to replace coal electricity generation in order to drop carbon emissions, and to provide the raw material to produce hydrogen, fuels and chemicals, the demand for gas is expected to rise considerably.

If we replace all of our coal plants as they die the amount of gas used in the power sector will dwarf anything we’ve seen so far.

At the same time, pipeline infrastructure has not caught up with potential supply because Americans just don’t want pipelines, even as they seem to want gas. Thousands of gas wells have been drilled in Pennsylvania but not completed because of the dearth of pipelines. And New England is literally dying to get that gas during their winters.

At that point, any rise in gas prices will have a domino effect on our economy, particularly California who has locked itself into a devil’s bargain between solar and natural gas, using neighboring states to help them out with nuclear and coal when too much solar comes onto the grid during the afternoon from April to September.

It’s why California keeps emplacing new natural gas plants as electricity prices increase and they close their low-carbon nuclear plants.

So hooking up to the global LNG market will help our industry immensely. And we seem to be innovative even in how we hook up.

But as Myers explains, LNG has always used long-term bilateral contracts between suppliers and buyers, with the price of the LNG indexed to the price of crude oil. LNG tankers were just shuttling back-and-forth between facilities and users and didn’t have any real effect on prices.

Then Cheniere Energy decided to base the price of LNG on low- cost U.S. natural gas, not international oil, and just added a fixed fee for liquefaction and transport to make their real profit, and offered potential customers unprecedented flexibility. Cheniere shipped its first cargo last year from its Sabine Pass liquefaction facility. Within a year, Cheniere had delivered four million metric tons of gas to 14 different countries.

Customers liked it.

And thus, the LNG world changed forever. And with it, America’s ability to set the future for its gas supplies.